Guide to Pay As You Earn (PAYE)

Determining the employment status of an individual

There is a legal difference between a contract of employment (known as a 'contract of service') and a 'contract for service'. A contract of employment applies to an employee-employer relationship. A contract for service applies in the case of an independent, or self-employed, contractor.

How to determine employment status

The Supreme Court judgement in the Karshan case outlines a five-step decision-making framework to determine an individual’s employment status for taxation purposes. Businesses who engage workers should use this five-step decision-making framework to determine whether a contract is:

a contract of service (the worker is an employee)
or
a contract for service (the worker is self-employed).

The Tax and Duty Manual Part 05-01-30 explains the decision-making framework and what the judgment means for businesses.

The five-step decision-making framework

The following five questions will assist a business in determining whether a contract is one “of service” or “for service”:

Does the contract involve the exchange of a wage or other remuneration for work?
Has the worker agreed to provide their services personally and can they sub-contract their work?
Does the business control what, how, when and, or where the work is done?

If you answered "no" to any of the above questions, the worker would be considered self-employed, subject to question 5. If you answered "yes" to all three questions, you should proceed to questions 4 and 5.

What do the facts and circumstances say about the true nature of the relationship between the business and the worker? Do the arrangements show that the worker is providing services on their own account or as an employee?
Is there any legislation that would change the answers to any of the above questions? For example, Section 112 of the Taxes Consolidation Act, 1997, provides that office holders are always employees for taxation purposes.

You can find further guidance on how to apply the five-step framework in Tax and Duty Manual Part 05-01-30.

All businesses should review the arrangements with their workers to determine their employment status as a result of the judgment. Some workers previously treated as self-employed will now need to be treated as employees for tax purposes. For those re-classified as employees for tax purposes, the business will have an obligation to operate Pay As You Earn (PAYE).